The banking turnover

Lebanon’s banks gear up for a new generation of bankers and customers

What BankMed is to the Hariris, BLOM Bank to the Azharis, BLC and SGBL to the different lines of Sehnaouis, Bank Audi to the Audis and Creditbank to the Khalifes is perhaps not as clear as a bell when it comes to determining ownership percentages to the decimal. The shareholdings become particularly blurred when banks are owned not only by individual family members, but also by family owned companies. However, while most Lebanese banks have a dynastic history and are still at least partly owned and managed by the families that founded them, management and decisionmaking has been forced into the open.

That is, behind these family owned machines stand layers of decisionmaking and management: boards, group executive committees and mid to senior management.

As the reins of the company are transferred from one generation of bankers to the next, the processes behind the transition are put under pressure to give way to a new, adaptive and capable generation of bankers that will drive the bank forward. Banks cannot remain a bastion of immoveable tradition, particularly when faced with the demands of a new generation of customers.

New bankers for new customers

The banks that are still managed by the old guard have a harder time adapting to the new generation, according to Tarek Khalife, Creditbank’s chair. “Banks have not changed significantly because they have not perceived a dramatic demand for change, because of the management that is from Generation X. So many banks, if you take the top six banks which constitute around 50 percent of the market, they have Generation X on the navigational front,” he says.

With a tricky new generation of customers whose needs and demands are changing — forcing banks to evolve whether or not their decisionmakers change — the banking business is becoming increasingly challenging. According to a European Financial Marketing Association and Oracle Financial Services 2010 report, banks need to start refining their engagement with Generation Y, which have different demands from the previous generation. As baby boomers approach retirement and start drawing more on their savings, the report says, Generation Y will constitute the new majority of customers who are still accumulating wealth.

In Lebanon, Generation Y prefers an ATM over a teller, and would rather not interact with anyone at all, according to banking executives. This is in particularly sharp contrast to the customer of the past, who would require coffee with the branch manager before he or she placed their precious riches into the bank’s coffers. Now banks are trying to cut down on these prolonged meetings as they are concomitantly decreasing in demand.

Beyond customer change, the banking sector is witnessing a second turnover — one of the internal workings of the banks. Though this has been happening for some time and will continue to develop slowly, some banks are witnessing a dynastic change, others are seeing an institutional turnover in management, while others are still managed by the old guard. As these large, slow moving economic vessels move on to the next generation of management — with yesterday’s interns becoming the top guns — these decisions are crucial to ensuring the right choices are made to retain talent.

A positive note is that out of the banks that Executive spoke with, a certain amount of them have high shares of young and qualified employees. Khalife boasted that during the time of the 2008 financial crisis, 100 percent of top management at Creditbank were already under 40, 80 percent of which were under 30. “They identify with Generation Y more than the old guard. If you want to ask them who they are, they say they’re early Generation Ys. That helped us on some level be receptive to this change or these requests from the younger generation.”

Similarly, Freddie Baz, chief financial officer at Bank Audi, claims that 38 percent of staff are under the age of 30, and that many middle to senior managers came in less than a decade ago. Bank Audi invested a lot in middle managers, having handpicked many of them as young talents with impressive backgrounds who were hired, trained and placed in management roles throughout the bank, he says, replacing an older generation of managers. “Now [with] the youth coming, they are being managed not by old fashioned managers, but by new style management,” he says.

Old style management is not only being replaced in favor of new style, but according to Semaan Bassil, vice chairman and general manager of Byblos Bank, they are also leaving on their own initiative. “Most branch managers are becoming younger, because the older ones are leaving or being relocated [since] they are no longer able to handle the stress or the requirements of compliance, of how to receive the client, or how to talk to the client,” he says.

[pullquote]“I’ve seen many international, family owned banks that have been run for generations as well governed institutions”[/pullquote]

Keeping it in the family

But it is not only young blood that makes for the success of a bank. By and large, especially in large banks, governance is king. This is important both in family owned and non family owned banks. And as the Lebanese banks are all too happy to point out, there is nothing inherently wrong with family owned banks as long as they are properly governed. “I’ve seen many international, family owned banks that have been run for generations as well governed institutions,” says Khalife.

In Bassil’s view, well managed family businesses often yield better results than listed companies. “But we forget that and people don’t want to talk about that,” he says.

This is perhaps not a surprising argument considering many banks still have important family components. Baz points out that at Audi — while the Audi family owns a 7 percent stake in the bank and family decisionmaking is represented by one family member on the group executive committee and two members on the board of directors — the group executive committee, which is the ultimate power within the group, is chaired by a non family member who is also the group CEO.

While no family owns a majority stake in a bank, family members are instead represented in management and decisionmaking. Byblos Bank has three family members in top management positions, acting as chair–general manager, vice chair–general manager and deputy general manager. Creditbank’s Khalife claims ownership of 50 percent of the bank, in addition to one other Khalife listed as a shareholder. The same two Khalifes are on the board of directors and in senior management positions. This pattern repeats itself throughout most of the banking sector.

There is some positive value to a brand which has a family name association. Freddie Baz explains that the Audi name has been linked to financial services for the past 200 years, starting in Sidon as a discount and foreign exchange business before it turned into a banking operation. “We’re talking about two centuries of tradition, experience and reputation. Of course the Audi family is a huge added value to the brand, with respect to its historic background,” he says.

But institutionalization is important if there are still family members running and managing the bank. With family owned businesses, there is always the concern that the selection process of management positions are biased towards family members. This is a concern for many reasons. First, putting underqualified talent at the top that has just been promoted because they were the second cousin twice removed will reflect poorly on a bank and can compromise their strategy. Of course Lebanese banks will be the first to defend their family bankers — and there are many great respectable bankers of family descent. But if the strategy of the bank is more concerned with the survival of family lineage than the bank as an institution, they will weaken the business. While Lebanese banks are very highly regulated in terms of corporate governance standards, rules set by the central bank and the rules set by being listed in local or foreign stock exchanges, they are perhaps more family ‘friendly’ than many of the bankers Executive has spoken with would like to admit.

Yet there is a lot of pressure on banks — at least compared to other sectors in Lebanon — to have high corporate governance standards. “Today banks are highly regulated,” says Bassil. Besides having to follow the central bank’s regulations, the handful of banks that are listed have to follow even more stringent transparency and governance requirements — all the more for those listed on foreign exchanges.

There are, however, certain internal governance policies that bankers give importance to in terms of institutionalizing the business. Khalife explains that it is not so much the number of family members in management positions as it is the overall concentration of decisionmaking power. In banks with a heavy family ownership component, family member shareholders will opt for representation, he says. And often, board representation is not enough — they will opt for management roles. “This is completely normal. Now, heading and steering and navigating a bank is not about concentration [of] family ownership; it’s about any concentration, per se,” he says.

“What really adds value is decentralizing decisionmaking and [forming] collegial bodies that take scientific decisions. If you have a human resources committee, it’s a committee, and it’s not somebody who decides who to move to which department … If you have risk management, if you have governance, if you have compliance, it’s all in committees. And when you have that, then you are institutional — whether you have a concentration in ownership or not,” adds Khalife.

He says that while sometimes family members are qualified, sometimes they aren’t. But this has little to do with being family owned or not — rather with the way the bank is run. “When your HR and recruitment processes are twisted, then they are twisted. If they are the right measuring instrument, [you] can’t break it for one rule, [even in the case of a] son or daughter,” says Khalife.

Banking a financially starved generation

While many banks are engaging with customers at an early age and some even proudly mention that they were among the first in Lebanon to accept customers under 18, the next generation of wealth accumulation in Lebanon may not live up to other global comparisons. Bankers’ hopes that Generation Y in Lebanon will be as prosperous as the generation was in economic hubs such as Silicon Valley may be a little bit wishful. Aside from the dynastic wealth inheritance of the 0.1 percent, young Lebanese adults have not been offered the same economic opportunities or basic financial resources to accumulate wealth at the same pace as young adults in more prosperous economies.

[pullquote]“Generation Y in our region has been deprived. It’s not the Generation Y of the West, where they have been enabled”[/pullquote]

“Generation Y in our region has been deprived. It’s not the Generation Y of the West, where they have been enabled and they’ve created value and you’ve got millionaires at 30,” says Khalife. “Until now … there have been few choices or access to finance besides commercial lending by banks. There is an array of interesting possibilities that are just completely absent. There are no angel investors; there has not been venture capitalism; there have not been real institutions of private equity; and until recently there have been no funds … There is nothing in between.” Though he acknowledges that these are starting to show up, compared to other economies of the globe, young Lebanese have been deprived.

Correction: A previous version of this article mistakenly claimed that lines of the Sehnaoui family are major shareholders in SGBL and Fransabank; they instead are major shareholders in SGBL and BLC, the latter of which is majority owned by Fransabank. Apologies.